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Fund Manager Focus - July 2009

Hassan Elmasry, Independent Franchise Partners - London

Founded in 2009, Independent Franchise Partners was formed by Morgan Stanley Investment Management's Global Franchise team which consisted of Hassan Elmasry, Michael Allison, Paras Dodhia, John Kelly-Jones and Jayson Vowles. The founding partners have more than 75 years of combined investment experience. Their investment approach focuses on quality and value.

Hassan Elmasry, an American, is IFP’s lead portfolio manager. He has 25 years investment management experience. He joined Morgan Stanley in 1995 and spent seven years leading the $10bn strategy. He was previously at Mitchell Hutchins Asset Management and First Chicago Corporation.

What kind of fund is Independent Franchise Partners?

“The short version of what we do: long-only, highly concentrated buy and hold with a multi cap and value orientation. We own only 30 stocks in the global portfolio and only 25 in the US portfolio. We invest only in companies that are dominated by strong intangible assets - powerful brands, exclusive patents, highly defining trademarks, licenses, distribution networks, copyrights. These are hard to replicate non-physical assets that can offer companies a durable competitive advantage.”

Who are your clients?

“We offer the strategy to all kinds of institutional clients: endowments, foundations, pension plans, sovereign wealth funds and high net worth individuals.”

You currently have $250 million under management and are talking of capping it – where and why?

“Because we are so selective, our investment universe is pretty small. There are only about 200 companies globally that fit our investment criteria – companies with dominant intangible assets and durable franchises that earn persistently high returns on capital. And because we are value-oriented investors – we like to buy these rare, great businesses at attractive valuations – so there are even fewer that make it into the portfolio. So with a very selective universe and strict valuation criteria for the portfolio, what we do is not infinitely scalable. We’ve limited the global product to $5 billion and the US program to $3 billion.” (Editor’s note – if the $5 billion target for the global fund is reached – an average position would be around $160 million. If the $3 billion target for the US fund is reached – an average position would be $150 million).

So total AUM of $8 billion? Equities only?

“$8 billion will be the total assets under management. Equities only. $5 billion in the global and $3 billion in the US.”

What is your active share ratio?

“We are completely benchmark indifferent. So the 30 stock portfolio looks dramatically different from the benchmark. We are not index huggers, in fact the opposite.”

Does your global program include emerging markets?

“Technically, there is nothing that prevents us from investing directly in emerging markets, but we don’t hold any companies in emerging markets right now. We have, however, captured plenty of economic exposure to the growth in emerging markets by investing in certain companies that do lots of business in those markets. The nice thing is that we can buy them with developed markets' levels of disclosure and transparency and valuation.”

What will your investment time horizon be?

“We ran this same investment strategy at Morgan Stanley for the last seven years and the strategy itself is over 12 years old so we’ve got good turnover statistics. Our average holding period is about 7 – 8 years.”

Do you use leverage?


Do you intend to vote your proxy?

“We do, and will use proxy advisers to help inform our decisions.”

Are you activist minded?

“No, not really. We tend to invest in companies that we believe are well run.”

What are the three most important things that influence your decision to buy a stock?

  • The quality of the intangible asset, we measure that in terms of its proven durability, the capital intensity required to sustain it and the free cash flow it generates.
  • The quality and integrity of the management when it comes to managing that franchise and re-investing the free cash flow.
  • Valuation, as measured by sustainable free cash flow yield.

Do you split sectors or geographies?


How would you describe your investment style?

“We focus exclusively on very high quality franchises with a strong value orientation.”

How do you screen stocks? i.e. if Phoenix-IR offered you a company meeting – how would you decide if you wanted to see management?

“If it’s already in our investment universe then we’d want to see the company. There are five of us and only 190 – 200 companies so we try to meet every one of them at least every 1-2 years.”

So 200 companies and five investment managers, do you look at 40 stocks each?

“No it doesn’t quite work like that, but close. My point is that unlike other global teams where analysts may be trying to cover hundreds of companies in dozens of industries, what we do is pretty different. We have a small group of investors following a carefully defined universe of companies with common characteristics that tend to fall into a small number of industries. We can bring a lot of focus to the research.”

So what are the seven or eight industries that are most of interest to you?

“We focus on tobacco; spirits; food manufacturing; household and personal care products; professional publishing; pharmaceuticals; medical equipment and then it gets more selective with the occasional software company, the occasional luxury goods company and the occasional industrial company that has a strong network.”

Do you have any market cap constraints?

“$1 – 2 billion would be our bottom end of our market cap range.”

What would be your average market cap of a holding?

“$20 - $25 billion.”

Given your themes are strong intangible assets, do you hold a lot of brand names?

“Yes, absolutely but not exclusively. We also own pharmaceutical companies like Novartis or companies like eBay or Moody’s (or S&P’s McGraw-Hill) where the intangible asset is not really a brand per se. We also own Kone, the Finish elevator and escalator company, because the installed base of equipment and attendant service network form is a very important barrier to entry.”

Any favorite companies?

“Our biggest portfolio position is BAT and it has been for several years. We’ve also got big positions in several other tobacco companies. We hold Kellogg. These guys are tremendous at managing their brands. Our European holdings include Reckitt Benckiser which we’ve held for ages. Imperial Tobacco does an excellent job on the IR front and we think highly of the way they run the business as well. Cadbury has been viewed as a problem child for a long time but we’ve been very patient shareholders and think the restructuring will bear fruit. We own Nestlé and Danone.”

Which companies don’t you favor?

“We try to avoid companies with average or low barriers to entry. We also try to avoid capital intensive or commoditised businesses. They require different skill sets than we have as investors. So we don’t own any deep cyclicals, commodities, heavily leveraged companies or companies whose products portfolios suffer from the risk of rapid obsolescence and require constant or rapid reinvention.”

How important is corporate access?


Where do you prefer to meet management?

“We travel pretty extensively and are happy to go to their offices. We are happy to do meetings here in London as well. We attend conferences for access but we’re not such a big fan of conferences as the meetings can be rushed and the conversations pretty canned.”

Any companies with great IR?

“Compared to several years ago, IR efforts have clearly become more sophisticated across the board. Many companies now do an outstanding job. Kellogg – the fellow that used to do their IR (Simon Burton) is gone but I think he left behind a very forthcoming culture. To a large extent you have to give credit to the people at the very top as that is obviously one of their priorities too.”

Who do you like to see from a company?

“It really depends on how well we know the business and then nature of our questions. It usually tends to be some combination of CEO, CFO and IR. We really appreciate access to line management when we can get it.”

How will you scale up to manage $8 billion?

“At Morgan Stanley, we were managing more than that with five investors. We’ve brought on one additional person to help us with the business side of the firm and a very strong suite of service providers to help us with back office and technology and the other nuts and bolts of running an asset management company so we think the business is well positioned to handle a growing client base.”

So finally, why should companies come and see you?

“Well, we know their time is precious and we are still a small firm so we don’t take corporate access for granted. They tell us that we’re the kind of investor they are looking for: fundamental, patient, long term oriented investors. We see statistics that show that the average share changes hands once every 11 months. That’s not a problem around here. Finally, our business is growing.”

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